MANAGEMENT'S DISCUSSION AND A (1) Background and overview The Telecommunication industry in general had a challenging 2014-15. Falling ARPU has been the concern for operators across the globe making it necessary for them to think innovative and offer differentiated services. The company continues to be relevant by introducing new innovative products and services with its state of the technology and solutions and is quite confident to add new contracts to growth. The company has continued to invent and grow its patent portfolio. In the past year the company was awarded 3 new patents. This shows the value of the company's investment in R&D. This increases the company's Intellectual property (IP) and reiterates the focus on innovation and the commitment the company has in contributing to the industry, new inventions. The company and management as always had their focus and commitment to R&D. The company has been investing in new additional products with significant focus on 4G LTE, NFV (Network Function Visualisation), Predictive Analytics, Mobile based Payment bank etc. The company also expanded their portfolio by developing new customer-requested feature functionality across both of its core product suites (Mobile Infrastructure Solutions and Services as well as Mobile Banking and Payments Solutions). Additionally, the company continues its expansion and application of its core capabilities in mobile data and enablement to create new product offerings that leverage the mobile depth and experience possessed by the company and its employees - the company's new product offering, "XIUS AMPLIO" being a sample. (2) Financial results The company reported a turnover of Rs. 10,072.85 lakhs in 201415 as against Rs. 10,550.75 lakhs in 2013. This generated an overall profit of Rs. 73.81 lakhs for the financial year under review. The board of directors of the company extended the current financial year to a 15 months period i.e. 1 January 2014 to 31 March 2015 to comply with the provisions of the companies act, 2013. Hence, the results of the operations for the current year are not directly comparable with the brvious year. (3) Business and Industry Outlook The company operates in two key mobile technology segments, namely core network infrastructure and mobile payments. Both these segments are subject to macro-economic business outlook and capital spending especially in the Telecom sector. Global growth in 2014 was lower than initially expected, continuing a pattern of disappointing outturns over the past several years. Growth picked up only marginally in 2014, to 2.6%, from 2.5% in 2013. Global business optimism dropped eight percentage points to net 35% in Q4-2014. This is hardly disastrous as global business optimism stood at just net 27% in Q4-20132. Telecom service providers are expected to invest US$ 346 billion towards capital spending (CAPEX) in 2015, indicating a flat growth. In 2014, CAPEX in fixed line telecom operations was 41% of US$ 346 billion, while 59% was in wireless business of operators.3 Industry Trends Surge in Data Usage - Data usage is increasing rapidly across the globe. Mobile data traffic grew 60% between Q3-2013 and Q3-2014.4 The number of mobile broadband subscriptions grew at a rate of 35% year-on-year, reaching 2.3 billion.5 4G LTE Penetration - 6GSA, the Global mobile Suppliers Association, has underlined the accelerating pace of development of LTE around the world by confirming that LTE subscriptions are growing faster than any other mobile communications system technology, and by a substantial margin. GSA forecasts there will be at least 450 commercially launched LTE networks globally by end 2015, up from 364 that had entered service by the end of last year, with deployment of LTE-Advanced technologies as a major industry trend in all regions. GSA calculated that LTE subscription net additions outpaced 3G/ WCDMA-HSPA by 21% during the last 6 months of 2014, with LTE leading in both Q3 and Q4. • There were 497 million LTE subscriptions worldwide by 31 December 2014. • A total of 290 million LTE subscriptions were gained in the year, equivalent to 140% annual growth. • LTE subscriptions grew by 115 million in Q4, over 36% higher than 3G/WCDMA-HSPA connections. • GSM subscriptions fell by 78.5 million in the same period. • The APAC region increased its share of connections to 47% by end December 2014 compared to 40% in June 2014. • North America is the second largest LTE market with 33% of global LTE subscriptions, down from 42.3% in six months brviously, while Europe increased its share in the same period from 14.3% to 16% by year end. Policy Management market reached just over US$ 1 billion in 2013 and is on target to become a US$2.5 billion market by 20187. Growth will be sustained by the uptake of dynamic monetisation use cases driven by the need for operators to innovate and grow revenues. Global Telecoms Deep Packet Inspection market is set to grow to US$ 1.6 billion by 2019.8 MVNO Revival 9The number of MVNOs in operation worldwide rose to almost 1000 by the end of 2014, new research from GSMA Intelligence has found. As of the end of 2014, the world's MNOs hosted 992 MVNOs and 260 MNO sub-brands. This rebrsents a total of more than 1,250 mobile service providers worldwide hosted by MNOs, in addition to their own core brands. Research shows that MVNOs remain most brvalent in mature markets where penetration (based on connections) has surpassed 100%. Europe is home to two thirds of domestic MVNOs (585), followed by Asia Pacific (129) and Northern America (107). By contrast, the MVNO sector remains in its infancy in Sub-Saharan African markets with just eight MVNOs across the region. The brsence of MVNOs is limited to less than a third of countries worldwide as they are a phenomenon that mainly applies to saturated mobile markets. The average connections (excluding cellular M2M) penetration rate among the 72 countries that host MVNOs stands at 128%, compared to the global average of 97%. This explains the large number of MVNOs in Europe, which has the second-highest regional penetration level (126%) and saw early moves by regulators to establish an MVNO market. Mobile Payments Competition in the mobile payments field has intensified worldwide, acceptance and usage of in-store mobile payments and the brferences of shoppers towards payment methods in remote M-Commerce differed from country to country. A general trend is the lingering concern of consumers towards security of mobile payment transactions. Mobile payments, comprising remote and in person retail payments made with mobile devices, are forecasted to maintain rapid growth in the next several years. The number of mobile payment transactions is forecasted to near 50 billion in 2015. Contactless mobile payment transactions and mobile wallets are expected to be the leading segments in terms of market growth10. According to Gartner, worldwide mobile payment transaction volume was around US$ 235.4 billion in 2013. It was estimated to be US$ 325 billion in 2014, and is expected to grow to US$ 717 billion by 2017. The growth in mobile payments has been driven by several factors, such as the growth in smart phone users, increased acceptance of mobile payments by merchants, a shift from magnetic strips to mobile wallets, and easy access to loyalty programs and coupons11. By the end of 2015, 5% of the world's 600 million to 650 million NFC-enabled phones will be used at least once every month to make contactless in-store payments at retail outlets. While 5% is not a staggering number, it rebrsents a considerable increase over last year's mobile payment usage rate. As of mid-2014, less than 0.5% of the 450 million to 500 million NFC-enabled phone owners used their mobile devices for in-store purchases12. All of the above industry trends and statistics continue to encourage the company to follow the product and services direction that it has set regarding its Mobile Infrastructure Solutions and Services as well as Mobile Banking and Payments. This data is further supported by the real-time, on-the-ground sales opportunities that the company is encountering. Summary The company's geographically diverse sales focus allow it to focus on those regions where businesses are optimistic, economies are holding their own or growing, and investments in mobile are continuing to be made. While the company continued to see further reduction of opportunity for its service bureau offering in the US brpaid market as well as globally, its core solutions for Mobile Infrastructure Solutions and Services as well as Mobile Banking and Payments, position the company to meet the key areas of growth and investment in the global telecom market as noted above. The majority of company's revenues going forward are of project related with back-ended cash flows with increased debtor days and collection cycle, as compared to the earlier years wherein majority of revenues were services based receivable monthly. However, with the change in the business model the margins are expected to be higher as compared to the larger services business revenue model during earlier years. (4) MEGASOFT Products, Solutions and Business Overview (A) Solutions The 2014-15 portfolios of solutions focused on two major areas: XIUS Mobile Infrastructure Solutions and Services enhance the way service providers across an array of industries deliver and capitalise upon next-generation mobile services. • XIUS MSP provides end-to-end infrastructure for 3G/4G Mobile Operators, MVNE/MVNOs, Converged Broadband 4G/LTE Service Providers, Mobile Operator Wholesale Departments, and M2M Service Providers. • XIUS Mobile Services Platform (MSP) offers a complete suite of cost-competitive and reliable infrastructure options that enable Mobile services delivery along with real-time rating and billing. • Megasoft is best positioned to enable service providers navigate an increasingly complex mobile ecosystem by allowing to launch branded mobile services. Megasoft was also awarded a global patent in early 2015 for the way how this platform delivers services to mobile users. XIUS Mobile Payments & Banking Solutions enable value-based relationships for financial institutions, government agencies, mobile operators and their customers that directly lead to improved customer loyalty and increased revenues. • Payment Manager gives operators the power to conveniently recharge mobile brpaid accounts, provide international recharge capabilities, bill pay post-paid account, and manage their distribution network. • Mobile Wallet allows operators, government agencies and other institutions to deliver secure and cost-effective methods of payment, while introducing cost savings and new recurring revenue streams. • Mobile Banking platform gives financial institutions the power to provide state-of-the-art mobile banking services. (B) Business Strategy and Priorities for 2015-16 The telecommunications industry has transitioned from voice-oriented services to a data driven, customer centric and on demand services. Mobile Operators and Internet Service providers are challenged to improve their profitability under stiff competition amid growing demand for bandwidth and capacity. The ability to optimise network resources while creatively monetising customer behaviour is gaining importance and "XIUS AMPLIO" a new product launched in early 2015 from the company will address this core need. The company realises the much-felt need of service providers for a solution that uniquely combines technology, brdictive analytics, with domain and operational expertise anchored around customer experience. "XIUS AMPLIO" enables service providers to refine the services they already provide, with a focus on creating richer, personalised experiences. With better intelligence on customer usage patterns, service providers can leverage new valuable sources of customer insight to drive and multiply data revenue. With over 50 billion things (devices) are expected to be connected by the year 2020, the Internet of Things (loT) will revolutionise enterprises across various industries. Megasoft is planning to address this great market potential with their service enablement platform that will be capable of integrating with diverse devices (things) and spectrum of loT applications. The platform will offer flexibility in terms of device, security, service and application management framework. For 2015-16 and beyond, the company will execute on the following approach to growing the business: (1) Mobile Infrastructure Solutions and Services With the forecast of continued mobile network infrastructure spending around the globe in 2014, especially on the data service, the company is well positioned with its MSP and XIUS AMPLIO solution to further address this area of need in the market. The company's success to date has been in Asia and the Middle East and the company has a strong sales pipeline for MSP in Asia, Middle East, Central & East Europe and Africa, developed through both direct and channel partner sales efforts, in-country agents, as well as NEPs (as we help fill a niche for them with smaller carriers). We will continue to expand our channels to further increase our global reach. Additionally, the MSP solution is continuously being enhanced with increased feature / functionality, expanded network components, multi-network technology and generation support. Such development enhancement and partnership will continue to allow the company to expand its offering in the mobile infrastructure market. The company's MSP delivers quality, reliable, dependent and easily expandable mobile services that allow multiple types of companies to deliver their customers the solutions and services demanded in the market today. For its MSP platform, the company, targets the MVNE / MVNO segment, Large Carrier wholesale divisions, Small & Mid-size mobile Carriers and the M2M/IOT segments. Additionally, MSP's expansion to support 4G and the introduction of XIUS AMPLIO opens up additional target markets for the solution sales: • Tier 1 Mobile Operators looking to reduce their LTE migration costs. This solution offers On-Demand 4G SDN Virtual Packet Core as well as a complete suite of 4G/LTE network components. • Converged broadband providers with 4G/LTE spectrum license that wish to launch a combined 4G service with 3G failover capabilities. • Mobile Operators, Fixed and wireless Broadband service providers, challenged with increase in bandwidth requirements while their ARPU not in par with the bandwidth increase, need ways to monetise and optimise their network. (2) Mobile Payments and Payments There is significant demand and opportunity for mobile banking and payment solutions in the market today ranging from opportunities created by Electronic Money regulation in Latin America, new banking initiatives for banking inclusion from the new government in India, the expanding demand for mobile services for banking customers, growing trust in Mobile Wallets by consumers and the market, as well as continued additional opportunities for mobile transaction processing. The company's Mobile Banking and Payment solutions are capable to address these needs. We continue our expansion in Latin America with our Payment Management solutions and we see continued growth opportunity in this region. Our sales pipeline in this area is active and we are expanding our reach through both direct and channel sales efforts. (3) New Products The company continues in its efforts to leverage its mobile infrastructure and transaction processing pedigree and depth of experience, and has identified several opportunity areas and will deliver new solutions to the market in 2015. As discussed earlier, the company already launched a product, XIUS AMPLIO, for this year targeting Mobile Operators and Broadband service providers and two more new products are in the SWOT analysis stage. (C) Operational priorities Sales, although not strictly operational, are the lifeblood of the company. Continued focus on maintaining a healthy pipeline and a steady stream of profitable contract closure is the priority. The company recognises that sales closure depends on satisfied and reference-able customers. It adjusts its operations focus and organisation to ensure customer account management and advocacy is in place for our customers as they are vital in aiding in the new sales closure process. R&D continues as the company's key strength and focus. Investment and expansion in the growth solution areas of mobile infrastructure as well as mobile banking and payments will continue to bolster our solutions' standings as compared to our competition and the needs of the market. Additionally, the company will continue to further expand and upgrade its R&D center and infrastructure capabilities to enable the launch of new market offerings. The company continues the rationalisation and optimisation of its operations capabilities. As one solution area wanes (Prepaid) and others expand, we adjust our data center operations, operations skill sets, and product/service offerings to match the needs of the market. The company continues its tight cost controls, debt reduction and repayment as well as monetisation of some of its real estate assets. With the above, we believe that execution of the four-pronged approach to growth in 2015 will be a success. (D) Sources of revenue The company derives revenues through the following revenue models: • Hosted managed Services (ASP) The Company operates its platform end-to-end in data centers and gets paid monthly based on a revenue-share or per-subscriber transaction fee model around a multi-year contract. The company also normally charges an upfront technology implementation fee from ASP customers. • Software licensing The company also offers its platforms on a capacity licensing basis to mobile operators, wherein its platforms are installed in the carrier's brmises in return for a one-time license fee for a stated limited capacity (subscriber, throughput, or other appropriate metric). • Share of transaction revenues In the mobile transactions market place, the company also earns from a share in transactions and this revenue stream is expected to contribute significantly to the overall revenues in the company's future • Services, Maintenance and Customization The company also realises revenues derived from customising its platforms to suit specific service needs of carrier customers. This is a steady revenue source with AMCs (Annual Maintenance Contracts). (6) Quality certifications The company has adopted and achieved the following international standards for process definition, industry best practices and continual improvement: • ISO 9001-2008 - Quality Management System (QMS) • ISO/IEC 27001:2005 - Information Security Management System (ISMS) The vision of QMS and ISMS is to institutionalise excellence in quality of serviceand data security of customers and organisation by developing and deploying simple, efficient and effective Processes using the latest International Standards Quality Management System The company has also undertaken various initiatives such as implementing an organisation wide Defect Prevention Program, Metrics Program, automation of testing processes and introduction of new tools. The Quality Improvement Program is based on the business needs, technology changes, customer feedback, suggestions and process performance. The Company has instituted processes that enable transition to new technologies and enable continuous process improvement. The company is certified for ISO 9001:2008 by bsi, India. Information Security Management System Information Security management at IT outsourcing centers has become one of the important areas of concern for organisations. Stringent information security measures are in place at the company to ensure business continuity and reduce business risks by brventing and minimising the impact of security incidents. ISO 27001 is a globally recognised information security standard used to identify, manage and reduce the range of threats to which information is subjected. The standard provides guidelines and directions to safeguard organisational assets and emphasises continuous improvement for information security. The company is also certified for ISO 27001:2005 by Bureau VERITAS Certification, India. Benefits The customers have benefited as a result of fewer defects, reduction in cycle time and improved delivery capabilities. This has resulted in high levels of customer satisfaction and repeat business. Implementing the processes has trained the organisation and people to be methodical and process-driven. The company has introduced and improved upon best-of-breed industry practices and standards and thereby improved the delivery capability. (7) Outlook While the global economic situation slowly improves, there are growing pockets of optimism where the mobile industry continues to see investment and growth. With new product launched this year and 2 more products in pipeline the company's product portfolio remains relevant and supportive of the market trends. The company continue to experience continued interest in the mobile infrastructure capabilities and offerings (especially LTE and Mobile/Fixed Broadband Data Monetisation) as well as the mobile banking and payments solutions. The company has been able to leverage the knowledge and experience in mobile infrastructure and mobile transaction processing to provide relevant and timely solutions to the mobile industry. Additionally, the company is leveraging the knowledge in the development of new mobile enablement solutions and capabilities, while creating the opportunity for additional Intellectual Property as well. (8) Risks and concerns The company's management embarked on a number of initiatives to manage business risks (given below): Market risk The company's growth is dependent on Mobile Telecom industry growth. The telecom industry has historically suffered from an extended sales cycle and high debtors' position, detrimental to cash flows. With the macroeconomic situation still fluid and the Telco industry facing falling ARPUs worldwide, sustained capital expenditure in the mobile industry remains uncertain and this may affect the company's performance. The company is also aiming at non-Telco customers for its mobile transactions platforms. While this reduces the company's sole dependence on mobile Telco's for its revenues, it may also pose unknown challenges and risks due to the company's lack of experience in these segments. With the company exploring new geographies, new products & services, the company anticipate new known and unknown competition and market risk. Protection of Intellectual Property Rights In a knowledge-driven business, the primary responsibility is to safeguard intellectual property. The company encourages employees to ideate and file patents to protect intellectual property. The company applied for 105 patents in the last few years, of which 27 were granted by the USPTO. Litigation There is an increasing trend towards litigation regarding intellectual property rights, patents and trademarks in the software and telecom industry. There are also other corporate legal risks including contractual performance and product performance. The company has an insurance policy in place to mitigate these risks. In respect of arbitrations moved by certain US clients against the company and its overseas subsidiary, the matter had been settled out of the court. The payments have been structured as per mutual agreement. Foreign currency fluctuation The company has a substantial exposure to foreign exchange-related risks on account of earnings denominated in foreign currencies by exporting software, products and solutions. A majority of the company's revenues are US$ denominated; the continued debrciation of the Indian rupee vis-a-vis the US$ can result in much higher interest and capital repayment outflows for the company. Also, such huge fluctuations make revenue and profit projections more unbrdictable. Client Concentration As already seen in earlier year, wherein the loss of one of the largest clients resulted in a decline in revenues, the company's top five clients contribute to more than 50% of its revenues, resulting in high dependency on these clients. The company expanded its sales focus on new geographies and market segments and will expand its revenue base and achieve a better sbrad in revenues and clients. Cash flow As the company's business model has gone through a major change and its revenues are project related to a large extent with back-ended cash flows, the company may continue to be under constant cash brssures. (9) Internal controls The company possesses an adequate system of internal controls to safeguard assets. Checks and balances were in place and reviewed at regular intervals to ensure that transactions were properly authorised and reported correctly. The Audit Committee, in consultation with Internal Auditors, reviewed the internal control systems at regular intervals and initiated corrective action(s) wherever deemed necessary. Additionally, the company has already initiated a corporate management initiative to define best practices in processes, methodologies, systems and metrics with a specific focus on customer interaction and service delivery. The company commissioned a new research and development organisation with supporting processes, customer support, managed services processes, management reporting and control systems (MRCS) and automation. Going forward, the company will regularly assess risks and controls for existing and new process flows. The continuance of the company's 'cash and caution' policy enabled the company to remain profitable at the end of the financial year. (10) Human assets The company enjoys cordial relationships with employees as it endeavours to provide them with a professionally rewarding and enriching work environment. The company possesses an effective performance management system that focuses on employee development, measuring key result areas, competencies and training needs. The company advocates work-life balance and welfare activities that enhance team cohesiveness. "F5" a welfare activity that was initiated last year has become a great success and has brought tremendously enthusiasm and motivation among the employees. To keep the skillset honed and up to date, the employees are professionally trained in technologies like LTE, Predictive Analytics & Big data. To ensure profitable contract closure the company has revised the sales incentive plan to motivate the sales organisation with more closures. 15% For and on behalf of the Board of Directors GV Kumar Managing Director D Sudhakar Reddy Executive Director Annual Report 2014-15 Place: Hyderabad Date : 26May2015 |